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Germany: the self-regulated franchising haven

Germany: the self-regulated franchising haven

Franchisors operating in Germany aren’t governed by a specific franchising law, but there are still several considerations to be made before gung-ho expansion

Germany’s history with international franchising can be traced back to the 1970s, when McDonald’s became one of the first international systems to try its luck with an opening in the country.

Today, many franchise networks exist within the country; both of domestic origin, and from overseas. German consumers are familiar with the biggest global names, but ‘made in Germany’ is still seen as an international seal of quality. Foreign brands need to truly bring their A-game in order to compete with local talent.

“Franchising in Germany is well-known because lots of people understand the model and now have the possibility to combine franchising with popular brands that they know; especially in the restaurant, trades, and fitness sectors,” explains Torben Broderson, CEO of the German Franchise Association.

As it stands, most franchised systems in Germany are in the services sector (43 per cent), followed by trade (29 per cent), gastronomy, tourism, and leisure (20 per cent), and crafts, construction, and refurbishment (eight per cent).

“We have some compounded rules which altogether form not franchise laws, but several general rules from which case law is then deducted”

An appealing opportunity

Germany’s franchise market is one of the largest in Europe, and this is thanks to a collection of factors that have boosted domestic brands, and have also enticed large international franchisors to seek out German master franchisees.

According to the country’s Association, the German labor force is the largest in Europe, and the overall business tax rate for companies is 29.8 per cent – a lower figure than many other European or North American regions.

One of the biggest appeals of opening a franchise in Germany, however, is that the country doesn’t have specific franchising laws that govern how a business can operate, negotiate, and grow. This doesn’t mean that it’s a completely lawless market, of course; Germany forms part of a group of countries worldwide with the most comprehensive and advanced protection of intellectual property rights.

Instead, Germany’s franchising culture is based on numerous good faith agreements, as well as rigid case law which has been successful in protecting both franchisors and franchisees for decades.

“Even during the pandemic, franchise networks have grown closer. They’ve exchanged experience and know-how”

“We have some compounded rules which altogether form not franchise laws, but several general rules from which case law is then deducted,” explains Dr. Benedikt Rohrßen, a partner at law firm TaylorWessing.

“Disclosure is a very important one that’s based on this idea of good faith between the parties. The courts ask the franchisors to have a level playing field of information with franchisees, so they disclose the most important issues which might affect the business or franchisee.

“If not disclosed, as in many other countries, the franchisee may then later – during the progress of the franchise agreement – claim that they weren’t disclosed some points and they subsequently want to withdraw from the agreement. And, in the worst case, may even claim damages.”

When it comes to the kinds of things that franchisors must disclose, there isn’t a law which provides a standardized list. But Rohrßen insists that this isn’t a complicated process that should dissuade brands, and shouldn’t differ from what they’d be used to in other Western countries.

“The German Franchise Association has published an abstract guideline on disclosure. I usually give clients a list tailored to their business, and franchisors should check with me what is really relevant; they don’t guarantee any turnover, for example, and they don’t have to take over the franchisee’s need for due diligence,” he explains. “They disclose standard things like whether there’s been a pilot, how existing stores are doing, and the idea behind the business.”

Germany in a post- COVID world

At the time of writing, 55.7 per cent of Germany’s population is fully vaccinated against COVID-19, and the country is showing strong signs of social and economic recovery.

This extends to Germany’s vibrant franchise industry, which is bouncing back from a particularly tough 2020 and looking ahead to more prosperous times.

As part of the German Franchise Association’s latest Franchise Climate Index study for example, which is conducted twice a year to get a perspective on how the country’s franchisors feel about the market, 93 per cent of respondents said that franchising remains a particularly crisis-proof business model.

“That’s a great statistic, isn’t it?” says Brodersen. “Even during the pandemic, franchise networks have grown closer. They’ve exchanged experience and know-how. I recently spoke with franchisors at a hospitality meeting, and they pointed out that franchisees felt lucky to have a partner to share information with.”

Other numbers to come from this latest study also show promising signs that Germany is firmly back on track. 45 per cent of respondents perceive the effects of the pandemic as ‘positive’, compared with only 35 per cent in the previous study. Furthermore, general mood among the franchise industry is up a reported 145 per cent in the first half of 2021 – a level it hasn’t reached since the second half of 2019, before the effects of the pandemic took hold.

“When is a business model successful? It’s successful when franchisees are satisfied. When the franchisees are happy. That is one of the main focuses in our quality management at the German Franchise Association,” says Broderson. The question remains: will Germany implement franchise laws in the future? With the introduction of regulatory laws across Europe like GDPR, this seems possible. But among the country’s franchising experts, the sentiment is a resounding ‘no’.

“We don’t need it! We don’t need franchise legislation and there’s no attempt from the government to create something like this,” explains Broderson. “The government has always invited the franchise industry to self-regulate, and that’s what we did. We contribute to self-regulation through our quality management of new members to the German Franchise Association.”

Key event: FEX21

The single largest German speaking franchise expo in Europe is set to take place in Frankfurt this year, with FEX21 returning after a digital edition of the expo last year

What: Franchise Expo Frankfurt 2021

When: November 4 - 6, 2021

Where: Frankfurt and online

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